08-Nov Graeme Wood Procter & Gamble November 2011

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1 Graeme Wood Procter & Gamble November 2011 For TP purposes, how does one identify which legal entity ( LE ) within an MNE group should get the profits from the brand value under the ALP? How should brand value affect a TP analysis of a related party sale of goods and services? How should brand value affect a TP analysis of a business restructuring transaction in which part of an operating business is transferred to a different member of the MNE group? 1

2 The terms brands and trademarks are often used interchangeably. They are not the same. A trademark is a legally protectable asset which is used to protect words, symbols, and other distinguishing characteristics of a product or service. A brand is more than the legally protectable trademark asset. It is more than the brand name. A brand is the personality that broadly identifies a product or service and how it relates to customers/consumers. Companies may value brands for M & A or accounting purposes. These values look at the value of the brand to the total group and not how that value is allocated between LEs in the group. Such valuations are normally not relevant for TP purposes. 2

3 No single answer what is the risky investment? Which LE incurs the costs and expenses? Some businesses/brands may be more driven by technology, e.g., Software or Pharmaceuticals. Some may be more driven by marketing, e.g., FMCG in general. Sales $82 billion Advertising $9.3 billion (11% sales) R & D $2 billion (2.4% sales) 24 separate billion dollar brands but Top 10 brands in US rarely feature in top 10 around the world; more than 50 brands in top 10 country brands of our top 15 countries 3

4 Differences in Consumers Around the World Culture Customs / Habits Religion / Values Nationality Ethnicity Language Economic Status / Development / Lifestyle / Income Age Education Climate Consumer Expectations Infrastructure / Quality of Life (e.g., availability of electricity, clean water, technology, appliances, medical/dental support) How does one identify which LE within an MNE group should get the profits from the brand value under the ALP? What are the key factors which should be taken into account? 4

5 Contractual rights of the parties Legal framework under commercial law is relevant Factors should include: Legal ownership of the trademark Right to exploit the trademark Provision of technology Investment in the brand/business Marketing expenditure Supply chain Technology Business risk Outcome The LE managing and bearing brand development expenditures (and the associated business risks) should be properly rewarded for its assumption of risks and associated expenditures over the duration of its arms length contractual rights. The mere use of a trademark by an LE licensee in the above circumstances should not give that LE an ownership interest in the brand in excess of its arms length contractual rights thus, no right into perpetuity (or any time after license termination) while termination of the agreement in line with its terms (and any applicable local laws) should not constitute a disposal of an intangible asset requiring additional compensation. 5

6 10 year license of trademark and technology for use in a new market in FMCG Licensee incurs all brand and business development expenditure and bears all associated risk Licensor incurs technology cost but has minimal risk as technology cost spread over its total business Under arms length principles Licensor would essentially have an almost fixed rate risk free return Licensee would expect to be entitled to the entrepreneurial profits (or losses) over the 10 year license since it is managing the risk and incurring the brand development costs and expenditures 6

7 How should brand value affect a TP analysis of a related party sale of goods and services? What are the key factors to take into account? Is there a difference compared to question 1? No different to question 1 or, indeed, to a standard TP analysis. What are the functions, assets and risks of the parties? What are the contractual rights re the exploitation of the brand and which LE has those rights and bears those risks? 7

8 Brand owner Manufacturer Principal Distributor Transaction Manufacturer to Distributor Manufacturer to Principal Principal to Distributor Tested party (TNMM/CUT) Tested party (TNMM/CUT) Tested party (TNMM/CUT) Distributor N/A Manufacturer N/A Manufacturer N/A N/A Distributor N/A TNMM or CUT would generally be applicable in establishing the return attributable to the LE which was not responsible for managing the creation of the brand value and the associated business risk. 8

9 How should brand value affect the TP analysis of a business restructuring transaction in which part of an operating business is transferred to a different member of the MNE group? What are the primary considerations? Contractual rights of the parties Legal framework under commercial law is relevant Contractual rights would normally include: Legal ownership of the trademark Duration of right to exploit the trademark Expectations and risks associated with exploitation of the trademark Termination provisions Indemnity provisions (if any) The anticipated economics associated with the contract should provide the Licensee with the opportunity to earn an arms length return over the duration of the contract. 9

10 What will be the position of the licensee towards the end of the license? The licensee will take an economically rationale approach within the terms of its contract. It will seek to renew its contract. If not, it may will reduce its brand related expenditures if it believes it will not earn an economic return. The mere use of a trademark by a licensee in the above circumstances should not give that party an ownership interest in the brand in excess of its arms length contractual rights thus, no right into perpetuity (or for any fixed period after license termination). Termination of the agreement in line with its terms (and any applicable local laws) should not constitute a disposal of an intangible asset requiring additional compensation. There are a number of examples of third party transactions providing such evidence. 10

11 Normal transfer pricing principles apply. Contractual framework important. Appropriate economic outcome for parties within context of contractual framework and each party s functions, assets and risks. Licensee using a trademark should not be deemed to acquire an ownership interest that continues in perpetuity, or even past the term of a license. Termination of an agreement in line with its terms (and any applicable local laws) should not constitute a disposal of an intangible asset requiring additional compensation. 11

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